DUBLIN – Takeda Pharmaceutical Co. Ltd. has convinced the board of Shire plc of the merits of its £46 billion (US$62.1 billion) cash-and-shares takeover offer. Now it must do likewise with Shire's investors – as well as its own.

The formal offer comprises $30.33 in cash and either 0.839 new Takeda shares or 1.678 new Takeda American depository shares (ADSs) per Shire share. It values Dublin-based Shire at £48.17 per share based on the current foreign exchange rate between U.K. sterling and the Japanese yen or at £49.01 per share based on the exchange rate on April 23, when Shire indicated provisional acceptance of Takeda's offering. Takeda plans to fund the cash portion of the transaction with a $30.85 billion bridging facility provided by an international banking syndicate.

Should the deal close, it would be the third-largest biopharma M&A transaction in terms of value. (See chart.)

The news that each company's board is unanimously backing the transaction moved the needle on both stocks. Shares in Takeda (Tokyo:4502) closed Tuesday at ¥4,638, up 4 percent. In the case of Shire, however, its share price is still well below the per-share valuation the offer implies. Its stock (London:SHP) closed in London at £4.0345, a gain of 4.6 percent on the previous close, reflecting continued uncertainties about the feasibility of the deal and the large component of Takeda paper contained therein. Takeda's stock is a dwindling asset. Notwithstanding Tuesday's rally, the share price is down almost 8 percent over the past month and, for Shire investors, a worrying 29 percent since the start of the year.

Peter Welford, analyst at Jefferies International, was not unduly surprised by the initial response from Shire's shareholders. "We expect Shire shares to perhaps trade at a relatively wide 10-percent-to-15-percent spread to the offer given close is not anticipated until [the first half of 2019], plus a significant component of the consideration is in stock," he wrote in an investor note.

Shire investors would hold about half of the enlarged company's stock, which would be listed in Japan and in New York. That could prove to be "problematic" or "unattractive" to some shareholders, he noted.

At the same time, the deal retains its basic logic. "We believe the offer value is reasonable," he noted. It represents a premium of about 60 percent to Shire's share price immediately before Takeda expressed an interest. It represents, moreover, a premium of 12 percent to Jefferies' net-present-value sum-of-the-parts valuation of Shire.

The fundamental question remains whether the two companies would fare better together or apart. Shareholders holding at least 75 percent of Shire's stock have to favor the transaction in order for it to take effect. The deal is also subject to approval by Takeda's offer document. Apart from the merits or demerits of the combination, Takeda's offer document estimates that the enlarged entity would attain $1.4 billion in annual pre-tax cost synergies three years after the transaction closes.

The largest share – 53 percent – would come from sales, marketing and administrative efficiencies. It would achieve those savings by eliminating overlaps in the marketing of gastroenterology and neuroscience products, closing redundant office locations, eliminating duplicated IT systems and central support functions, and cutting payroll and other costs. Another 43 percent of the savings would come from rationalizing R&D spending by cutting duplicated programs. Just 3 percent would be achieved from manufacturing and supply savings.

Those savings, however, would come at a price. By Takeda's reckoning, achieving those efficiencies will entail an estimated one-off layout of $2.4 billion during the first three years following the deal's close.

The enlarged company would also probably face a higher tax bill, although Takeda has not run the numbers. "The proposed tax structure of the combined group has not been finalized at this stage, but the Takeda directors expect that the combined group may not be able to maintain Shire's current tax profile," the offer document stated. That would take some of the gloss off the anticipated savings.

"We assume that our effective tax rate will be a few points below our current tax rate but not at the level of Shire," Takeda's chief financial officer, Costa Saroukas, told an analyst call audience Tuesday.

"We do not run the company or organize the company around tax structure," CEO Christophe Weber added.

Shire's favorable tax treatment arises from its Byzantine corporate structure. The company's U.S. operational headquarters are in Lexington, Mass., its international operational headquarters are in Zug, Switzerland, its registered office is in Jersey and its "group headquarters" are in Dublin. It has forecast its annual tax rate for the current year through 2020 at 16 percent to 18 percent.

Dublin, where Shire recently opened a new office complex, looks to be an obvious loser in the planned post-merger cost-cutting drive. "Takeda will commence a review of the functions to be undertaken at Shire's current headquarters in Dublin within the first year following completion of the acquisition," the offer document stated.

Takeda plans to maintain its corporate headquarters in Japan, expand its R&D presence in the Boston area, and to maintain "major regional locations" in Japan, Singapore, Switzerland and the U.S.

The enlarged company would have five core business areas, including oncology, gastroenterology, neuroscience, plasma-derived products and rare diseases, which would account for about 75 percent of the combined business. The U.S. would account for 48 percent of revenues, Japan for 19 percent and other international markets for 33 percent. Historical pro forma revenue for the combined company is $30.6 billion, while combined earnings before interest, depreciation and taxes (EBIDTA) comes to $9.1 billion. The enlarged company would carry about $56.25 billion in net debt, or 6.2 times EBIDTA. Takeda's management was adamant on the call that it would aim to deleverage quickly to attain a leverage ratio of 2 times EBIDTA in the medium term.

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